DTC Promotional Strategies For Manufacturers
With more and more direct-to-consumer brands appearing on the market and huge, manufacturing companies moving in this direction, I have decided to dig deeper into the why and the how.
This is a 30-minute read but believe me, it’s worth it. To be able to skim through the article, I prepared a short index of topics we will cover in this article:
- What are direct sales?
- What do you lose by not selling directly?
- What can you learn from purely D2C brands?
- What is a channel conflict?
- How do manufacturers move to direct sales? Examples
What are direct sales?
Just in case, to be on the same page with everyone, what we mean by direct sales in this article is sales done directly from the manufacturer to the consumer, without any intermediary (no third parties, no dealers, no retailers, nobody). We do not mean: MLM, pyramid business, sales done to friends.
D2C manufacturers are manufacturers who sell directly to the consumer, in a stricter definition which we adapt for the purpose of this article, manufacturers who sell directly to the consumer, without using any other (indirect) channels. Many manufacturers who are not D2C (they do sell indirectly – for example through dealers) have D2C brands (brands whose products are sold only directly). More than 40% of brands now sell D2C and are predicted to reach $130bn by 2025.
What characterizes D2C brands?
“Direct-to-consumer (or D2C) companies manufacture and ship their products directly to buyers without relying on traditional stores or other middlemen. This allows D2C companies to sell their products at lower costs than traditional consumer brands, and to maintain end-to-end control over the making, marketing, and distribution of products. Unlike their traditional retail competitors, D2C brands can experiment with distribution models, from shipping directly to consumers, to partnerships with physical retailers, to opening pop-up shops. They don’t need to rely on traditional retail stores for exposure. These well-positioned startups are not just competing with some of the biggest retail brands in mattresses, razors, shoes, and more. They’re competing by rethinking not just the product, but also the retail model.” – CB Insights.
Creating what the customers want and giving it to them in the way they want it. Working in small iterations, changing the product constantly, involving customers in the creation process.
“If a consumer chooses your product over a competitor’s on a retailer’s website, you might have won a sale, but you’ve lost the opportunity to build a relationship,” says Alex Becker, global VP of branded manufacturers at the commerce-as-a-service solution provider Digital River.
D2C allows companies to control their brand’s story and relay their messaging directly to consumers. How efficient would your communication be with, let’s say, your mum (or another relative/friend) if there was always someone in between? What if you always had to call someone else, someone you don’t know, tell them everything you want to tell your mum? Then they would call your mum, tell her everything they remember from what you told them. Then she would reply, to that stranger, and the stranger would pass the information back to you. Do you think this would be an efficient conversation?
As a brand, communicating to your customers through a dealer or another intermediary, you take a risk. You might not communicate exactly what you want, you might not get enough feedback from your customers, and definitely not in real time.
“When first launching a product called the Milky Jelly Cleanser, for example, CTO Bryan Mahoney recounts extensive product research going on the Into the Gloss blog. Weiss posted in January 2015 asking her readers, “What’s your dream face wash?” As they got answers, they classified the responses that they got by ingredients and concepts. Over the course of analyzing those 400+ comments, they came to a formulation they believed would be a hit with their audience.” – Glossier
If you lose the connection with the customer, you lose the valuable insights you could get if you were conversing with them directly. You also lose the data that could help you make better products or take better decisions regarding any part of your strategy.
Using detailed customer data, especially if the primary channel is digital, creates massive opportunities for D2C brands to measure everything, test, and iterate.
If you communicate directly with your customers, they can even help you co-create the products to build the perfect product for themselves!
Solyent – the company producing food replacement powders, bars, etc. – is the perfect example of learning from data. They continuously improve their product, launching a new version of the product based on customer insights. Thanks to listening to their customers, they have built a cult-like following with a forum where customers help other customers iterate and experiment on Solyent’s product formula. Read more on how Solyent sold over $10M of meal replacements.
It is proven that the brands which sell directly have a much higher retention rate than those who don’t. It is logical. If you communicate directly with the customers, you know their needs, you let them co-create the product with you, you have appealing loyalty programs, and you even introduce subscription-based product delivery, which makes their life easier.
D2C brands often have attractive loyalty clubs or offer subscription services to make sure the retention of customers is high.
Direct-to-consumer brands in replenishable categories, like the razor brand Dollar Shave Club and the tampon brand Lola, use subscription models to boost business in lieu of broad distribution networks. Brands are taking steps to build customer loyalty that could easily turn into paid perks. Glossier, for example, offers subscribe-and-save on its site for skin care products and builds a social content platform that will ask people to sign up.
Having recurring revenue with high retention means faster growth. You keep more of your existing customers around, they refer more new customers to you because they’re happy, and you can increase revenue faster because you’re not churning through so many people each month.
“We’re seeing new, digitally native brands consider more what loyalty and memberships mean for their businesses. It’s an example of how at the highest level, in the DNA of these brands, they are by default thinking about lifetime value, repeat rates, and how to get customers to stick around” – Corey Pierson, co-founder of customer analytics company Custora.
The User Experience
Have you ever been on a visit to your dealership store, looking at your stand and thinking “well, this is not what I have imagined”? Your customers too.
The most powerful thing a D2C brand can create around their business is superior (usually digital) user experience: flawless, smooth, omni-channel experience. A digitally enabled service on each step of the customer journey, from purchasing to fulfilment and customer service, will differentiate a D2C from the competition and allow the brand to engage and retain customers much closer than through their physical products alone.
With the rise of mobile, social, and cloud technologies, customer expectations continue to increase. Customers demand more seamless experience. For many businesses, customer experience is a competitive advantage that attracts and keeps customers.
When wholesale manufacturers sell through retail distributors, they have no control over how the product is sold. They’re at the mercy of the distributor to ensure that the customer leaves the store (online or offline) happy and satisfied. By selling directly to consumers, companies can imagine how the customer journey should take place and implement the strategy required to make it happen.
A deep understanding of the end consumer is required to ensure that any direct sales effort improves the customer experience.
You can access new markets without them
In the past, dealers were needed to enter new markets either due to politics/monopolies or because of their deep knowledge of the local market. This is no longer true, at least not for most markets. Currently, you can enter the market more easily in most of them, at least in Europe, USA, Canada, Latin America, Asia, Japan, Australia (partially even in the Middle East, without the need of dealers to let you in the market), and in most industries. Except for some industries, like car sales in the US, which are regulated.
Ecommerce has changed the rules of the game
As mentioned above, online sales give brands the reach they have never had before. The customer behavior is changing, they switch more and more to online buying even for high-value products they previously wanted to see in person. One of the most shocking numbers I have learnt recently is that 82% of Tesla Model 3 sales have been done by customers who have never even tested the car. You do not need your brand’s physical presence in brick-and-mortar stores to bring customers’ attention and sell the product. You need a strategy.
What can you learn from purely D2C brands?
There are some brands that started as D2C or moved to this model at a very early stage.
Starting with direct sales straight off is much easier than moving to direct sales from other models, because from the very beginning you are building your product ordering, distribution, your marketplace suitable for this model. These companies have developed a lot of capabilities that might be hard to adapt for manufacturers just starting with direct sales. Nevertheless, they are the best ones to learn from – you can always adapt their strategy to your specific conditions. They are a great source of inspiration!
The automotive company with the most buzz around it.
One of the reasons is the purely direct distribution – you can order a Tesla car either online, from their website, or…
in the Tesla shop (where Tesla Sales Assistant will help you to buy it online, from Tesla’s website, on their tablet). Basically, you can buy their cars only online, Tesla shops exist just to let you try the car or get help with online purchase. Simple as that.
The process takes approx. 1 min, sales assistants in Tesla stores help you to complete your order online. The car can be delivered to your house or to the Tesla store.
Tesla’s marketing strategy is very different from traditional manufacturing companies in many ways – direct sales are just one part of it, which we focus on in this article.
Tesla proves that car manufacturers do not really need car dealers in between as you can give to consumers the information via other channels (website, social media, Youtube) and you can let them test the car thanks to the very generous return policies in case they do not like it, for whatever reason. 82 percent of customers bought their Model 3 without ever having taken a test drive.
How did Tesla get the word out about their cars, if they are not at the car dealerships and therefore, supposedly, they should be less known than other cars?
- Internet – you can reach almost all customers nowadays through paid ads or organic search.
- The very controversial owner (and the whole company communication), who creates buzz around the product.
- Referral program.
Referral, currently also connected with a game (as of 23/05/2019):
You and anyone using your referral code to buy a Tesla will receive 5,000 free Supercharger miles! On May 28, this will revert back to 1,000 miles.
Each referral now also gives you five chances to win a Founders Series Model Y or Roadster supercar! Tesla owners who already have free Supercharging get ten chances to win.
Supercharger miles might not be that appealing but winning Founders Series Model Y supercar might be… in any case, worth creating some more buzz around.
The previous referral program, which ended on 2 February 2019, was more exciting, with more levels and also non-monetary rewards like invitations to some special events, such as SpaceX launch.
Although your product might not be as innovative and your company not as popular in the media, a referral program is something you can definitely do to spread the word about your product.
Can there be a more common skin care product than a razor for men? This is a highly competitive market, currently oversaturated with many different types of razors.
A start-up, Dollar Shave Club, knows this. They have designed their competitive advantage based on this. In the world of so many razors, what men really want is a good razor. A good-enough, affordable razor. They do not want to wander around a store each time they need to make the purchase. They want constant quality without much thinking about it. This is exactly what Dollar Shave Club delivers. A razor, each month, for one dollar, straight to your home, with a package of necessary accessories, if you want to. Subscription-based model, with one product only.
An incredible, million-view, staged (of course!) but pretending to be just authentic, casual and nonchalant viral video, buzz from the media (that were informed about the video coming up before), and boom! Another multi-million company. One good product. Fast forward to the end of H2 2018, and Dollar Shave Club is now a USD$1bn+ brand, following its acquisition by Unilever. Now they offer three products:
Their main strategy remained: making hygiene easy and straightforward for men. How does Dollar Shave Club convert so many people if they are actually not in the stores, they sell only online, and people do not “see” the products before buying? They offer free shipping and free trial size products to get you started:
To spread the information about the product and to get people to trust an unknown company, they use mainly their referral program. For each friend who joins the subscription, you get 5$ off which is almost two months of subscription. They also offer gift cards (so that you can give your male friend an easy start on the subscription box):
To keep customers loyal, they offer a growing discount scheme (a kind of loyalty program, gamified):
Another company that’s currently disrupting the men’s grooming industry with this strategy is Harry’s. What initially started as an online-only shaving subscription service has turned into a massively successful men’s grooming brand that sells their products through an e-commerce store as well as in various big-box retailers such as Target and Walmart (they entered there in 2019).
It was also acquired by Edgewell Personal Care (the date coincides with the time of entering retail stores). This company has avoided a channel conflict by maintaining a standard price for their products across all sales channels to circumvent any price competition between the retailer and manufacturer.
Of course, having stock in the supermarkets costs them much more than having the stock in their own, online store. How do they differentiate the offer available in the dealer stores (Walmart, Target) and directly online? Just like Dollar Shave Club, they offer a trial on the website.
In the shops (Boots, Target), they offer only ready sets, not the subscription model, and they do not offer a free trial there.They also have a referral program on their website, to spread the word (5 pounds per referral).
"Our story began with a simple desire: to make the right choices for our families. We were parents in search of safe options, but unsure of where to turn. We needed one brand that we could go to for trusted products and information. And when we couldn't find what we were looking for — and realized we weren't alone — the idea for Honest was born.” — Jessica Alba.
Alba's company, Honest, sells eco-friendly, organic, affordable (compared to competition) products for children and mothers. Within three years, since 2015, they became a business worth millions.
Their success is accounted to Alba’s social media presence, well-designed products, the mission and vision which customers feel on their own, and building a community around them. With social media, Alba managed to grow an evangelist community around the Honest company products. The company has also a well-functioning referral program (20$ for each friend who joins in thanks to referral) and subscription-based services which reduce churn greatly.
What is a channel conflict?
Of course, building a brand through the D2C strategy has its challenges. In particular, a robust D2C presence could endanger another important marketing channel: selling through retail partners. Nike’s aggressive push for direct sales, for instance, puts its relationship with retailers in an awkward position.
As The Good Group Inc says:
“When brands try to avoid channel conflict with their retailers they often sacrifice sales on their ecommerce site. But it doesn’t have to be that way. If the manufacturer sells direct-to-consumer (D2C), the buyer is happy, but wholesalers, dealers, sales representatives, and retailers aren’t. The most successful companies that are implementing D2C into their selling strategy are finding a balance between selling through their own ecommerce stores and also through retailers.”
Direct and indirect Sales
When manufacturers sidestep retailers to sell direct-to-consumer – can be a common culprit for a conflict because of creating competition between the manufacturers and retailers that sell their brands.
The main conflict cause is that the manufacturer and retailer may be selling the products to the same markets, but at different prices. If you have too many different channels, you run a risk of a price war, of having inconsistent customer experience. Price wars can lead to losing profits (margin), losing value in the eyes of the customers, or losing retailers (who will just sell other products).
How to avoid a channel conflict?
- Offer exclusive products on your ecommerce site (not the same portfolio as you sell through your distributors). Examples: shoes customized to the buyer’s feet (this is what Nike, Adidas, and Timberland are doing), a unique product design (limited editions), a specially branded tent, or a jacket that can only be purchased on your site.
A variation of exclusive products would be exclusive bundles of products.
- Differentiate something else than the price – keep the RRP (recommended retail price) stable and give other perks to your direct customers. By giving exclusive promotions (+free product) or additional services (extended warranty, better warranty conditions), you do not undercut your retailers. You add value by including something extra.
3) Invest in better customer experience – you might get more direct customers if the way you deliver products or present them on your marketplace is way better than what your distribution does. Apple again could be an example of offering better customer experience in their own stores (online and offline).
4) Invest in a great loyalty or referral program – this is not a direct discount and will not start a price war but can be valuable for your customers and make them choose to buy directly as well as actually become loyal to your brand. This is a double win – loyalty and direct sales with higher margins/more learnings for your brand.
5) Offer personalized discounts – you can always offer personalized coupon codes for your customers, based on their specific characteristics/behavior. As such, discounts can be distributed directly to specific groups and not that viral, they do not directly cause a price war or distributor dissatisfaction.
How do manufacturers move to direct sales?
Nike and Adidas
Nike and Adidas, producing sports shoes, clothes, and accessories – in both, owned shops and through retailers – have been moving towards D2C sales since 2017.
In October 2017, Nike announced that its business model would change to reflect a greater focus on online sales channels, as opposed to traditional retail sportswear stores. Though Nike still planned to offer its shoes to third-party retailers, the company announced at the time that it would be thinning the ranks of its roughly 30,000 retail partners to focus intensely on only about 40 of those partners going forward.
In April 2018, Adidas announced that it was on a very similar track. By 2020, Adidas plans to double its online sales and close 50% of its stores in the United States. There were similar announcements around the same topic in other countries, for example Poland. The company has also been investing in the technology and digital infrastructure needed to support these ambitious goals, including developing a proprietary mobile app that customers can use to shop its online store. Adidas CEO Kasper Rørsted said at the time that the company’s website was its most important store and main priority in terms of asset allocation.
Both companies are already reaping the benefits of moving to direct sales. In January, the announcement of the planned expansion of the company’s direct-to-consumer sales drove the shares of Nike to their highest price in two years. Nike’s digital business also produced a growth rate of 18% between the fourth quarter of 2016 and the fourth quarter of 2017. Meanwhile, Adidas’ continued investment in its direct e-commerce business contributed to a 21% annualized growth rate in the first quarter of 2018.
How do Nike and Adidas manage to have both direct sales and indirect sales, without hurting the other channel? How do they differentiate the offer between the channels?
Nike has an affiliate program which helps them work with micro-influencers and to get more sales landed in their own store. Most probably it’s cheaper than having a retailer in place (lower commission). Nike has a sort of loyalty program called Members Club – it does not offer monetary discounts but non-monetary benefits like expert advice on fit and style, free shipping, VIP events, and priority access to new/special edition products. This way, they are trying to build a community around the products.
Nike also offers quite big flash discounts with coupon codes on their website:
This lets them set the price lower on the website without actually lowering the market price and forcing dealers to go below RRP.
There is even a website that is dedicated just to Nike discount codes (although with some third party collecting those – maybe with affiliate links).
This way, Nike offers different “special” conditions and discounts and encourages users to buy directly from them (skipping retailers), while retailers can keep the price at the same level.
Adidas offers an affiliate program too. They have a loyalty program as well, launched in 2017 (the same year when they announced they would go into a more D2C model), called Creators Club. It has some elements of gamification with four levels you can achieve (and the respective perks):
- Challenger (0–999 points): Limited editions, personalized content, and an overview of all purchases made, regardless of the channel.
- Playmaker (1,000–3,999 points): Exclusive customization tools, special offers and a birthday present.
- Gamechanger (4,000–11,999): Free personalization, early access to drops and priority customer service, including “Skip the Line” and a dedicated support number.
- Icon (12,000+): Access to personalized training and nutrition apps, invites to special events, and high-priority access to sneaker drops.
Turning the traditional rewards concept on its head, a user’s ranking isn’t solely based on purchase, but also considers interaction – such as attending events and participating in the community. For example, writing a review equates to 50 points, while making a purchase translates into 10 points for every $1 spent.
They also offer discounts if you subscribe for the newsletter (in the form of a discount code you can use once on your account):
For brands like Nike or Adidas, the D2C model is not a huge transition, rather a shift of focus – they have been selling directly already. What about brands that have no background selling directly, no infrastructure (logistics, e-shop or retail stores), purely manufacturing brands?
Nestle bought Blue Bottle Coffee (which is a small start-up offering coffee subscriptions for specialty coffee and selling accessories for alternative coffee brewing like Chemex, Aeropress, V60 dripper, and others).
Short-term car rental business is one of the D2C approaches to skip car dealerships. Car manufacturers also decided to first acquire, learn, and then implement it on their own sites. Mercedes-Benz with BMW own Car2Go and ReachNow (which merged in April 2019), and GM owns Maven. In each of these cases, the automaker has created a wholly-owned subsidiary entity to rent cars for an hour or a day, with a local service center to keep them maintained. This model neatly bypasses dealers and traditional rental agencies for occasional urban drivers.
Apple currently having a mixed channel approach with 29% of sales done directly, 71% through retailers (Apple authorized resellers, AT&T, Sprint, Verizon, the biggest retailers like Walmart, eBay, Amazon). Apple sells heavily through retailers but it slowly starts moving towards direct sales as well. The number of dealers was always limited and very well chosen. Usually, the first steps of the customer journey are on their website or in their stores – located in the most visited areas.
Apple offers an app referral/affiliate program that was giving back to the users a 7% commission for referral in 2017 and was cut to 2.5% in 2018. They also offer a loyalty program which starts if you have spent in the last 12 months >5000$ on Apple products.
Apple’s way of keeping customers loyal does not depend on the loyalty/referral programs but it helps them to keep bigger accounts with them (directly, not through resellers) and to spread the information about the apps (through a small affiliate program).
Samsung has been mostly selling its products through dealers and in their own offline shops. They do not have direct sales online, but they have their own website where they connect dealers. First step… a little bit less risky when it comes to a channel conflict – dealers know that Samsung provides them with clients. On the other hand, as Samsung does the marketing and acquisition themselves, commissions for the dealers in case they get sales from Samsung website can be lower than in case Samsung would like to be in their shop. This (probably) gives a higher margin to Samsung and lets them collect the data, get loyal customers, and reap a part of the benefits of direct sales (besides of the “purchase” part of the customer journey).
How does Samsung work on the customer loyalty and acquisition costs in case of direct sales? How does Samsung incentivize customers to shift to direct sales?
They have “special offers” for customers who buy directly on the Samsung website/in the Samsung offline store. An example of that is – currently (May 2019) in the USA – trade your old phone and get a 300$ discount on the latest Samsung model. The same promotion runs in France but with a 100EUR discount only.
They also run promotions with discount coupons if you send your contact details to the company. What’s more, they have some general sales on different products, which often, instead of giving an instant reduction, convert the discount into loyalty points (Samsung Rewards).
They offer special financing options (0% interest rate monthly instalments) to the clients who buy directly from them (skipping dealers).
Samsung rewards program is a loyalty program Samsung offers to their customers, if they buy directly from them (website/offline shop). The program lets you accumulate points that you can use to get discounts on further purchases.
They also offer a discount program for students/military/government/companies.
Even such an intermediary-dependant industry as automotive is trying to move to direct sales, and here are some of the reasons why:
- People rely less and less on the sales reps in the car dealer salons to obtain information about vehicles. J.D. Power and Associates found that 53% of internet shoppers looking for automotive information use mobile devices.
- Clients are not really satisfied with the intermediaries – an example study says that 87% of Americans don’t like some aspect of car dealerships. 61% feel that the car dealership is taking advantage of them.
- Customers are aware of the commission the car dealers make on the car sale. They prefer to avoid these costs.
- Leasing is becoming more and more popular (the new “sharing” culture and subscription-based services make people more and more open to the idea of just renting a car), which makes it easier to try the car for a short term (so a one-hour test drive is getting less and less important).
They are already selling cars directly online in the UK. This is similar to Samsung’s offer for discounts if you return your old phone – you can also return your current car (any brand, in specified conditions). They also offer leasing you can subscribe for on the website.
They also offer a loyalty program with Ford rewards – Fordpass.
Manufacturing is rapidly moving towards a multi-channel commerce model that integrates several channels (e.g. online, print catalogs, and sales teams) into a single, unified ecosystem. Those manufacturers who achieve effective application of e-commerce in manufacturing stand to have a competitive advantage above those manufacturers stuck in a brick-and-mortar only world. Direct sales are becoming the differentiator in 2019. Looking ahead, leading manufacturers will take the multi-channel concept a step further and prioritize the implementation of omni-channel commerce platforms — technologies that deliver seamless shopping and fulfillment experiences across all possible connection channels. Some of the manufacturers will move to direct sales only.
Wherever you are with your transformation to omnichannel or to direct sales specifically, make sure you harness your customers’ loyalty, use the power of referral, and make sure you optimize your promotions. Even if you are afraid of a channel conflict or cannibalizing your own sales, there are strategies you can implement to avoid this.
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